Johnny Fuller owns and manages Johnny’s Restaurant, a 24-hour restaurant near the city’s medical complex. Johnny employs 9 full-time employees and 16 part-time employees. He pays all of the full-time employees by check, the amounts of which are determined by Johnny’s public accountant, Mary Lake. Johnny pays all of his part-time employees in cash. He computes their wages and withdraws the cash directly from his cash register.
Mary has repeatedly urged Johnny to pay all employees by check. But as Johnny has told his competitor and friend, Steve Hill, who owns the Greasy Diner, “First of all, my part-time employees prefer the cash over a check, and secondly I don’t withhold or pay any taxes or workmen’s compensation insurance on those wages because they go totally unrecorded and unnoticed.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the legal and ethical considerations regarding Johnny’s handling of his payroll?
(c) Mary Lake is aware of Johnny’s payment of the part-time payroll in cash. What are her ethical responsibilities in this case?
(d) What internal control principle is violated in this payroll process?